When structured and administered properly, the financing of traditional life insurance premiums can bring your clients substantial benefits.
These include cash savings, important gift tax considerations, and the ability to accumulate wealth in a tax-favorable manner while taking advantage of today’s low interest rate environment. However, how do successful advisors overcome today’s biggest challenge when financing client premiums — the additional collateral component?
Here are three things to know about this strategy.
1. Collateral value
By using real estate as additional collateral in premium finance arrangements, advisors can unlock considerable opportunities. Zillow reports that, in 2017, the value of U.S. housing stock grew to $31.8 trillion, marking an all-time high. Having the ability to collateralize these real estate values in securing large life insurance premium finance transactions can mean the difference between choking on the five-yard line and a touchdown victory dance — for client and advisor alike.
(Related: How to remove greed from premium financing)
2. Real estate as collateral vs. securities as collateral
How can insurance carriers, and advisors, benefit from this type of premium finance arrangement?
A premium finance arrangement using real estate as gap collateral removes collateral capacity limitations, thereby substantially increasing the persistency rates of this block of business. Every major life insurance carrier that engages in the premium finance market must balance the premium finance block of business in their overall portfolio. Market downturns may create requirements for additional collateral. Also, if clients pledge a brokerage account with limited value or with a deep discount (up to 50% in some circumstances), they may not have enough collateral to weather the storm — or may decide to jump ship when tides rise too high.
3. Effects on policy sales and performance
Providing clients the option to use a dormant asset, like real estate, as additional collateral on a premium finance transaction creates an increased collateral capacity that directly translates into higher persistency rates for insurance carriers issuing these products — a win / win / win for client, advisor and carrier. Unlocking these real estate values presents tremendous planning opportunities, such as reviewing existing cases where liquidity was limited for non-financed premiums and existing premium finance cases. Reviewing these plans with a professional to swap out collateral positions from cash equivalents to real estate (including primary residence, residential income properties, commercial properties or farmland) can increase client satisfaction, and lead to new sales.
The structuring and annual administration of a life insurance premium finance arrangement is critical to the plan’s long-term success.
A premium finance arrangement that utilizes real estate as gap collateral allows advisors to close some of the industry’s largest life insurance sales.
Additionally, these arrangements create an excess collateral capacity that increases the persistency of this block of business.
In conclusion, these advances in the premium finance marketplace deliver a unique and meaningful value proposition for consumers, advisors and insurance carriers alike.
— Read Premium financing is dead. Or is it?on ThinkAdvisor.